Friday March 29, 2024

Rev. Rul. 84-179

GiftLaw Note: If a person possesses any "incidents of ownership" in a life insurance plan, the plan under Sec. 2402 may be included in his or her estate. In this ruling, the decedent initially purchased the insurance policy and irrevocably transferred the policy and all incidents of ownership to his wife. However, when she passed away, the policy was distributed to a testamentary trust for the benefit of their child, with the husband as trustee. At the husband's death, the question was raised whether or not serving as trustee of the trust is an "incident of ownership," that will require inclusion in the estate of the husband.

Reg. 20.2042-1(c)(4) indicates that an incident of ownership is present if the decedent could change the beneficial ownership or the time or manner of enjoyment of the policy. However, the surviving husband held powers in a fiduciary capacity and had relinquished all other interests. Therefore, the decedent did not posses incidents of ownership and the policy was not includable in his estate.

Rev. Rul. 84-179, 1984-2 C.B. 195, 1984-53 I.R.B. 7.

Internal Revenue Service Revenue Ruling

LIFE INSURANCE POLICY IN TRUST; DECEDENT AS TRUSTEE; INCIDENTS OF OWNERSHIP

Published: December 31, 1984

Section 2042. - Proceeds of Life Insurance, 26 CFR 20.2042-1: Proceeds of life insurance.

Life insurance policy in trust; decedent as trustee; incidents of ownership. A decedent, to whom powers over an insurance policy were transferred in trust, did not have incidents of ownership in the policy if the decedent's powers could not be exercised for the decedent's benefit, and the decedent did not transfer the policy or any consideration for purchasing or maintaining the policy to the trust. Rev. Rul. 76-261 revoked.

ISSUE


For purposes of section 2042(2) of the Internal Revenue Code, does an insured decedent possess incidents of ownership in an insurance policy if the decedent transferred all incidents of ownership to another person who, in an unrelated transaction, transferred all incidents of ownership to another person who, in an unrelated transaction, transferred the policy in trust and, at death, the decedent was a trustee with discretionary powers which, although broad, could not be exercised for D's personal benefit?

FACTS


In 1960, D, the decedent, purchased an insurance policy on D's life and transferred all incidents of ownership to D's spouse. The spouse designated their adult child as the policy beneficiary.

The spouse died in 1978 and, by will, established a residuary trust for the benefit of the child. D was designated as trustee. The insurance policy on D's life was included in the spouse's residuary estate and was transferred to the testamentary trust. The drafting of the spouse's will to provide for the residuary trust and the appointment of D as trustee were unrelated to D's transfer of the policy to the spouse.

As trustee, D had broad discretionary powers in the management of the trust property and the power to distribute or accumulate income. Under the terms of the policy, the owner could elect to have the proceeds made payable according to various plans, use the loan value to pay the premiums, borrow on the policy, assign or pledge the policy, and elect to receive annual dividends. The terms of the will did not preclude D from exercising these rights, although D could not do so for D's own benefit. D paid the premiums on the policy out of other trust property. D was still serving as trustee when D died in 1984.

LAW AND ANALYSIS


Section 2042(2) of the Code provides that the value of the gross estate includes the value of all property to the extent of the amount receivable as insurance under policies on the life of the decedent by beneficiaries (other than the executor), with respect to which the decedent possessed at date of death any of the incidents of ownership in the policies, exercisable either alone or in conjunction with any other person.

Section 20.2042-1(c)(2) of the Estate Tax Regulations provides that the meaning of the term 'incidents of ownership' is not confined to ownership of the policy in the technical legal sense. The term includes the power to change the beneficiary, to surrender or cancel the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc.

Section 20.2042-1(c)(4) of the regulations provides that a decedent is considered to have an incident of ownership in a policy held in trust if under the terms of the policy the decedent (either alone or in conjunction with another person) has the power (as trustee or otherwise) to change the beneficial ownership in the policy or its proceeds, or the time or manner of enjoyment thereof, even though the decedent has no beneficial interest in the trust.

The legislative history of section 2042 indicates that Congress intended section 2042 to parallel the statutory scheme governing those powers that would cause other types of property to be included in a decedent's gross estate under other Code sections, particularly sections 2036 and 2038. S. Rep. No. 1622, 83rd Cong., 2d Sess. 124 (1954). See Estate of Skifter v. Commissioner, 468 F.2d 699 (2d Cir. 1972).

Sections 2036(a)(2) and 2038(a)(1) concern lifetime transfers made by the decedent. Under these sections, it is the decedent's power to affect the beneficial interests in, or enjoyment of, the transferred property that required inclusion of the property in the gross estate. Section 2036 is directed at those powers retained by the decedent in connection with the transfer. See, for example, United States v. O'Malley, 383 U.S. 627 (1966), 1966-2 C.B. 526. Section 2038(a)(1) is directed at situations where the transferor-decedent sets the machinery in motion that purposefully allows fiduciary powers over the property interest to subsequently return to the transferor-decedent, such as by an incomplete transfer. See Estate of Reed v. United States, Civil No. 74-543 (M.D. Fla., May 7, 1975); Estate of Skifter v. Commissioner, above cited, at 703-05.

In accordance with the legislative history of section 2042(2), a decedent will not be deemed to have incidents of ownership over an insurance policy on decedent's life where decedent's powers are held in a fiduciary capacity, and are not exercisable for decedent's personal benefit, where the decedent did not transfer the policy or any of the consideration for purchasing or maintaining the policy to the trust from personal assets, and the devolution of the powers on decedent was not part of a prearranged plan involving the participation of decedent. This position is consistent with decisions by several courts of appeal. See Estate of Skifter; Estate of Fruehauf v. Commissioner, 427 F.2d 80 (6th Cir. 1970); Hunter v. United States, 624 F.2d 833 (8th Cir. 1980). But see Terriberry v. United States, 517 F.2d 286 (5th Cir. 1975), cert. denied, 424 U.S. 977 (1976); Rose v. United States, 511 F.2d 259 (5th Cir. 1975), which are to the contrary. Section 20.2042-1(c)(4) will be read in accordance with the position adopted herein.

The decedent will be deemed to have incidents of ownership over an insurance policy on the decedent's life where decedent's powers are held in a fiduciary capacity and the decedent has transferred the policy or any of the consideration for purchasing and maintaining the policy to the trust. Also, where the decedent's powers could have been exercised for decedent's benefit, they will constitute incidents of ownership in the policy, without regard to how those powers were acquired and without consideration of whether the decedent transferred property to the trust. Estate of Fruehauf; Estate of Skifter, above cited at 703. Thus, if the decedent reacquires powers over insurance policies in an individual capacity, the powers will constitute incidents of ownership even though the decedent is a transferee.

In the present situation, D completely relinquished all interest in the insurance policy on D's life. The powers over the policy devolved on D as a fiduciary, through an independent transaction, and were not exercisable for D's own benefit. Also, D did not transfer property to the trust. Thus, D did not possess incidents of ownership over the policy for purposes of section 2042(2) of the Code.

HOLDING


An insured decedent who transferred all incidents of ownership in a policy to another person, who in an unrelated transaction transferred powers over the policy in trust to the decedent, will not be considered to possess incidents of ownership in the policy for purposes of section 2042(2) of the Code, provided that the decedent did not furnish consideration for maintaining the policy and could not exercise the powers for personal benefit. The result is the same where the decedent, as trustee, purchased the policy with trust assets, did not contribute assets to the trust or maintain the policy with personal assets, and could not exercise the powers for personal benefit.

EFFECT ON OTHER REVENUE RULINGS


Rev. Rul. 76-261, 1976-2 C.B. 276, is revoked.
Rev. Rul. 84-179, 1984-2 C.B. 195, 1984-53 I.R.B. 7.




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